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Overall it was a rather quiet week, with the S&P 500 remaining basically flat (down 0.3%), on a light sprinkle of economic news. The most important was that new jobless claims continue to be strong, with just 236,000 reported. Combined with about 5.7 million job openings the labor market remains resiliant which is good news for wage growth.
More important in the short-term is that corporate earnings have indeed been a big winner this quarter, indicating that the market does have a non-tax reform catalyst to maintain its current lofty levels. Specifically, with 91% of S&P 500 members now having reported 75% and 64% of beat their EPS and sales expectations, respectively. In fact, as a whole the S&P 500’s EPS is up 13.6% YOY, the best quarter since Q3 of 2011.
Meanwhile in terms of new additions to the portfolio we continue to enjoy a steady diet of lower priced triple net lease, and retail REITs, which fell 3.3%, and 3.6% on the week, respectively. That’s a combination of the market pricing in the June rate hike (78.5% probability) but also the ongoing concerns over traditional brick and mortar retailers falling victim to the rise of e-commerce led by Amazon (AMZN).
There are 2 important factors for value dividend growth investors to remember. First, the interest rate sensitivity of REITs generally follows the rule that the longer the leases are, the more rate sensitive the REIT. That’s because these kinds of REITs, especially triple net, and retail, use long-term, 10-20 year leases to lock in predictable cash flow. But this also means that they have less rental raising power in the face of rising inflation, which higher long-term rates signal.